Investors intrinsically know two fundamental principles of investing: (1) don’t fight the trend and (2) don’t pay too much to hold an investment. But do these simple principles actually lead to superior returns? In this article, the authors report the results of an empirical study covering 20 major markets across four asset classes in an extended sample period from 1960 to 2014. The results confirm overwhelmingly that having a favorable trend and carry leads to significantly better returns, on both absolute and risk-adjusted bases. This finding appears remarkably robust across samples, including the period of rising interest rates from 1960 to 1982. In particular, the authors find that while carry predicts returns almost unconditionally, trend following works far better when carry is in agreement. The authors believe that this simple two-style approach will continue to be an important insight for building superior investment portfolios.

This article originally appeared in the Summer 2015 edition of The Journal of Portfolio Management. ©2018 IPR Journals. All rights reserved.
It was authored by Vineer Bhansali, Josh Davis, Matt Dorsten and Graham A. Rennison.

The Author

Josh Davis

Global Head of Client Analytics

Matt Dorsten

Portfolio Manager, Quantitative Strategy

Graham A. Rennison

Quantitative Portfolio Manager


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Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit,inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies withlonger durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and thecurrent low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidityand increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline invalue due to both real and perceived general market, economic and industry conditions. Currency rates may fluctuate significantly overshort periods of time and may reduce the returns of a portfolio. Commodities contain heightened risk, including market, political,regulatory and natural conditions, and may not be suitable for all investors. Diversification does not ensure against loss.

The models evaluate securities or securities markets based on certain assumptions concerning the interplay of market factors. Models used may notadequately take into account certain factors, may not perform as intended, and may result in a decline in the value of your investment, which could besubstantial. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and eachinvestor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investmentprofessional prior to making an investment decision.

Hypothetical examples are for illustrative purposes only.No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown.Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not representactual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance resultsand the actual results subsequently achieved by any particular account, product or strategy. In addition, since trades have not actually been executed,simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the marketsin general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and allof which can adversely affect actual results.

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